Consumer 'tightwads' hurting US?

June 3, 1980

By Harry B. EllisStaff correspondent of The Christian Science Monitor

Washington

White House advisers have watched in stunned disbelief as American families have slammed their wallets shut. Apparently believing they had been told by President Carter that it was unpatriotic to spend, consumers have sat on their hands and stopped buying.

"It has gone way beyond what we wanted," said Alfred E. Kahn, chairman of the Council on Wage and Price Stability, in an interview.

"It was never anybody's intention to say that the use of credit cards or credit is bad. Convenience use is clearly not a problem. What was at stake was abuse," said Charles L. Schultze, chairman of the Council of Economic Advisers, in a telephone interview. "If you knock 20 percent off consumer spending, you would have a deep depression."

Questions about the future of the US economy abound, as millions of American families find that their buying power has shrunk to levels of nearly two decades ago.

Has the tide really been turned against inflation, as President Carter claims? If so, is depression the price that must be paid?

Much will depend, Dr. Schultze says, on the attitude of American consumers themselves, whose spending fuels the vast US economy.

Given the overwhelming response of Americans to what they perceived as a signal to stop buying, top officials now want to avoid the impression that they are switching signals.

At risk would be the credibility of government, from President Carter on down. Also, the continuing need to fight inflation might be blurred.

There is a "real danger," Mr. Kahn said, that people will not recognize that the underlying inflation rate still is rising and "now is dangerously close to 10 percent."

Many experts, in other words, say they believe that inflation remains a deeply serious problem, despite the fact that falling mortgage costs and interest rates may shove the consumer price index down from its dizzying 18 percent inflation pace.

Something, however, must be done to cope with the expanding costs of recession, including unemployment that threatens to rise substantially above the present 7 percent.

For some months, in other words, the United States will be caught up in a conflicting economic maelstrom, in which inflation and recession will demand different remedies.

How to achieve a proper balance is a problem that leaves not only ordinary Americans, but policymakers, too, groping and uncertain.

Confusion is heightened by campaign rhetoric, which tends to paint the economy and its future in starkly different colors.

President Carter, for example, insists he is committed to a balanced 1981 budget, when almost everyone else sees little chance of achieving that goal.

"Every time unemployment rises 1 percent," said a government official, "it costs the budget approximately $25 billion -- $20 billion in lost tax revenues,

With the jobless rate now climbing, US Treasury spending required by law may more than swallow up proceeds from President Carter's proposed oil import fee and plunge the fiscal 1981 budget into the red.

A precedent is the current 1980 budget, with a deficit now expected to reach more than $46 billion. Last fall, Congress and the White House had hoped to bring it in under $30 billion.

Fueling the extra outlays are oil price hikes, which make it more expensive to run the nation's military machine, plus high interest rates, forcing the Treasury to pay more to service the national debt.

Now that interest rates are dropping, this sector of the budget may begin to shrink, government officials hope.

Mr. Carter's oil import fee, designed to add 10 cents a gallon to the cost of gasoline, currently is under challenge in Congress and the courts. Loss of that fee would remove a cushion on which the President counts to help balance the 1981 budget.

"If the President gets everything he wants in the way of additional revenues [oil import fee, withholding taxes on interest and dividends]," said a senior government official, "and if unemployment averages 8 percent in fiscal 1981, then the budget could be balanced."

"But," the official added, "there could be no tax reduction throughout fiscal 1981, nor any stimulatory spending for jobs, or anything else."

This would mean no tax cuts through the bulk of 1981, although the United States was mired in recession and families were hit by sharply higher social security taxes, beginning Jan. 1, 1981.

On that date, the social security tax rate will jump from 6.13 to 6.65 percent and the amount of income taxed will grow from this year's $25,900 to $29 ,700.

Under these circumstances, observers doubt that either the President or Congress can hold out against some form of tax cut in coming months.

Mr. Carter forbids his aides even to discuss a tax cut publicly, because the President insists that taxes should not be trimmed until the 1981 budget is balanced.

A consensus exists, however, that when a tax cut comes, individuals should be granted enough relief to offset the social security tax increase, and that businessmen should be given incentives to plow more money back into new factories and equipment.

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